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Growth moderation priced in
High growth phase of CV cycle behind us; growth to moderate
Uttarakhand production to help margins & FY12 earnings growth
The stock trades at 9.7x P/E on our revised FY12 estimates
Cut TP to INR70 based on mid-cycle EV/EBITDA multiple of 7x
Volume growth to moderate
We believe the best years of the
commercial vehicle (CV) cycle are behind
us. After two years of 35%+ growth, we
expect growth in heavy-truck sales to
moderate to 15% in FY12 and further to
10% in FY13. Historically, CV cycles have
lasted for 4-5 years with two years of very
high growth followed by moderate growth
and then negative growth. We expect
volume growth in buses (15% of medium
& heavy CV industry volumes) to be even
slower at 5% over FY11-13 as orders
from government agencies lose steam.
However, Uttarakhand plant to keep margins stable
Ashok Leyland has been very proactive in raising prices to pass on input
cost pressures. While moderation in demand may mute pricing power,
higher production at its tax-exempt Uttarakhand plant should prevent
margin contraction, in our view. We expect Ashok Leyland’s EBITDA
margin to stay flat y-y in FY12, while we are building margin contraction
for most other auto stocks.
LCV JV to start contributing in 2HFY12
Ashok Leyland’s LCV joint venture (JV) is scheduled to start selling
vehicles in India in 2HFY12. These vehicles will be contract
manufactured for the JV at Ashok Leyland’s Hosur plant. The contract
manufacturing, per se, is a low-margin activity. However, the JV, if
successful, would contribute meaningfully to Ashok Leyland’s earnings
growth. We estimate that a monthly volume of 2,000 vehicles at a 10%
EBITDA margin can add 4% to EPS. In the absence of clarity on volume
targets and profitability, we have yet to build in revenue from the JV into
our estimates.
Trim estimates; cutting TP to mid-cycle multiple
We cut our FY12 and FY13 EPS estimates by 10% and 9% respectively
as we have reduced our volume and margin assumptions. We now
estimate 13% volume growth (company guidance of more than 15%) for
FY12 and 9% for FY13. Despite lowering our volume estimates, we build
in 18% EPS CAGR over FY11-13, helped by relatively stable margins.
We cut our TP to INR70 (from INR85), based on a target FY12E
EV/EBITDA of 7x (earlier 8x), in line with the sector’s historical mid-cycle
multiple, as we believe the industry is now past the high growth phase of
the CV cycle. Risks to our TP include weaker-than-expected CV demand,
an increase in the competitive intensity, and commodity price inflation.
We maintain our BUY rating.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Growth moderation priced in
High growth phase of CV cycle behind us; growth to moderate
Uttarakhand production to help margins & FY12 earnings growth
The stock trades at 9.7x P/E on our revised FY12 estimates
Cut TP to INR70 based on mid-cycle EV/EBITDA multiple of 7x
Volume growth to moderate
We believe the best years of the
commercial vehicle (CV) cycle are behind
us. After two years of 35%+ growth, we
expect growth in heavy-truck sales to
moderate to 15% in FY12 and further to
10% in FY13. Historically, CV cycles have
lasted for 4-5 years with two years of very
high growth followed by moderate growth
and then negative growth. We expect
volume growth in buses (15% of medium
& heavy CV industry volumes) to be even
slower at 5% over FY11-13 as orders
from government agencies lose steam.
However, Uttarakhand plant to keep margins stable
Ashok Leyland has been very proactive in raising prices to pass on input
cost pressures. While moderation in demand may mute pricing power,
higher production at its tax-exempt Uttarakhand plant should prevent
margin contraction, in our view. We expect Ashok Leyland’s EBITDA
margin to stay flat y-y in FY12, while we are building margin contraction
for most other auto stocks.
LCV JV to start contributing in 2HFY12
Ashok Leyland’s LCV joint venture (JV) is scheduled to start selling
vehicles in India in 2HFY12. These vehicles will be contract
manufactured for the JV at Ashok Leyland’s Hosur plant. The contract
manufacturing, per se, is a low-margin activity. However, the JV, if
successful, would contribute meaningfully to Ashok Leyland’s earnings
growth. We estimate that a monthly volume of 2,000 vehicles at a 10%
EBITDA margin can add 4% to EPS. In the absence of clarity on volume
targets and profitability, we have yet to build in revenue from the JV into
our estimates.
Trim estimates; cutting TP to mid-cycle multiple
We cut our FY12 and FY13 EPS estimates by 10% and 9% respectively
as we have reduced our volume and margin assumptions. We now
estimate 13% volume growth (company guidance of more than 15%) for
FY12 and 9% for FY13. Despite lowering our volume estimates, we build
in 18% EPS CAGR over FY11-13, helped by relatively stable margins.
We cut our TP to INR70 (from INR85), based on a target FY12E
EV/EBITDA of 7x (earlier 8x), in line with the sector’s historical mid-cycle
multiple, as we believe the industry is now past the high growth phase of
the CV cycle. Risks to our TP include weaker-than-expected CV demand,
an increase in the competitive intensity, and commodity price inflation.
We maintain our BUY rating.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
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